Cannabis retailers in parts of the country say they are struggling to sell Canopy Growth Corp.’s Tweed-branded oils and gel capsules, resulting in a glut of unsold inventory and raising the tricky question of how to handle returns in the nascent cannabis industry.

“They are just not selling. We have been talking to Canopy for some time now about the issues with their oils and gel capsules. They have known for months that most of the retailers are having problems selling them,” said Mark Goliger, chief executive of National Access Cannabis, a recreational cannabis retailer with 35 stores in Alberta, Saskatchewan and Manitoba.

In its latest quarterly results, Canopy recorded a gross revenue adjustment of $8 million ($6.4 million after excise taxes), citing the risk of “oversupply of certain oil and gel-cap formats in certain markets.” In a conference call with investors and analysts Thursday morning, management acknowledged that although their adult-use oils and gel capsules had sold well initially, demand had been slipping of late.

“It’s normal course in business. We are always talking with retailers, looking at the mix of what they have and the mix of what we are preparing. That’s why we decided to take that $8 million provision,” said interim CEO and co-founder Mark Zekulin, who has led the company since former co-CEO Bruce Linton was fired in early July.

Canopy’s recreational revenue declined by 12 per cent this quarter, the second consecutive decline in quarter-over-quarter revenue from adult-use sales. Its overall market share in the adult-use segment also declined, dropping the company to second place behind Aurora Cannabis Inc.

Canopy’s stock closed down nearly 15 per cent on Thursday, following the release of the results.

Canopy did not disclose how much of their recreational cannabis revenue came from oils and gels, nor the quarter-over-quarter performance of those categories.

Gel capsules serve as a vehicle to consume diluted cannabis oil, and often function as safer alternatives to smoking or vaping dried cannabis flower. Cannabis-infused oils and gel capsules are typically used for pain relief, insomnia and anxiety but are also consumed recreationally.

One pot shop owner in the Greater Toronto Area, who asked not to be named for fear of damaging his relationship with Canopy, told the Financial Post that Tweed’s gel capsules were amongst the “worst-selling” cannabis products in his store, but also noted the store itself was partly to blame for the inventory backlog.

… we ordered too much of it initially because we knew it was available and we just wanted to stock our shelves

Toronto area pot shop owner

“The problem is, we ordered too much of it initially because we knew it was available and we just wanted to stock our shelves,” the owner said. “Our margins are going to take a hit because I have boxes of Tweed product — oils and gelcaps — sitting in my back office.”

He added that they had “no problem” selling dried cannabis flower from all of Canopy’s recreational brands.

While Goliger said that Canopy’s oils and gel capsules would eventually sell at the right price, the backlog is raising the issue of how retailers deals with returns and excess stock.

Cannabis retailers in all provinces except Saskatchewan order product through a provincial wholesaler. It is unclear — even to retailers — if unsold product can be returned to the provinces.

Canopy, for its part, deals directly with provincial wholesalers (except in Saskatchewan) and the mechanics of returns differ from province to province and are based on terms in individual supply agreements between a licensed producer and the province.

“This is such a nascent industry that the control boards are still trying to figure out returns. So we don’t know yet if we’re going to take a hit from unsold Tweed product,” Goliger said.

This is such a nascent industry that the control boards are still trying to figure out returns

Mark Goliger, CEO, National Access Cannabis

Canopy began selling its CBD-dominant, Tweed softgels on the recreational market last November, with former CEO Bruce Linton touting them as the “first legal ingestible product available in Canada” in an interview with the Post at the time.

“I like to say that we have, on the market right now, the Canadian version of the Gummy Bear. We want to see what kind of outcome that product will get because people are basically ingesting it,” Linton said.

Jamie Burns, chief executive of alcohol and cannabis retailer Alcanna Inc., which operates primarily in Alberta, reiterated that part of the problem was that retailers bought too much.

“From January till June, we just couldn’t get dried flower in Alberta. And then when you look at THC oil and gel capsules, there was a lot of Tweed product out there. So we bought what we could get,” he said.

Burns pointed out that it was not just Tweed-branded oils that his retail chain — Nova Cannabis Co. — is having problems selling.

“It’s all oils. To the extent there was any Aurora oils or Organigram oils, they just did not seem to take off in Alberta. There’s a lot more interest in oil and capsules in the Toronto market, based on the one store we have there,” he said.

Some Nova stores have had to discount oil products by as much as 80 per cent in order to sell them, Burns said.

A request for comment to the Ontario Cannabis Store regarding the sales of Tweed products went unanswered. The Alberta Liquor, Gaming and Control Board, and the Manitoba Liquor and Lotteries Board declined to comment.

The BC Liquor Distribution Branch’s cannabis division told the Post that while they could not speak to “individual product sales or whether one brand is doing better than another,” they have found that oils and gel capsules are some of the province’s “most popular” products.

“The way I see it, Canopy had incredible success coming out of the gate in October,” Zekulin said on the earnings call. “So if you give me the choice of moving from 10 per cent to 20 per cent in market share, or coming down from 35 per cent to 25 per cent, I’d rather take the latter.”

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